Wednesday 7 July 2010 04.48 EDT
First published on Wednesday 7 July 2010 04.48 EDT

It's a classic riddle: how to maintain and even enhance the quality of public services while attempting to close the biggest black hole in Britain's finances since the second world war.

Over the past year, council boardrooms, thinktanks and Whitehall departments have heard little else except how to do more with less, and that groundswell has now become a tidal wave breaking over the public sector.

The delivery models that provide existing public services are considered by some to be unfit for purpose. In a report last December, entitled World-class Public Services, the employers' body the CBI said: "Parts of government are still using outdated and inefficient approaches to deliver public services that hamper innovation and fail service users and the taxpayer. Continuing business as usual is not an option."

It is a view that has gained ground. Last year, the then cabinet minister Liam Byrne said: "Whitehall doesn't yet work corporately enough" – a remark that even a decade ago would have been a fairly incongruous statement for a Labour minister to make. Now it seems merely pragmatic.

The coalition government has revealed its programme for public services, the chancellor's budget has laid out the scale of the challenge, and a change of a similar magnitude is now needed in the mindset of commissioners of public services. Only then can the expertise and innovation of the third sector, including social enterprises, charities, voluntary groups and new delivery structures, such as employee-owned organisations and codesigned services, be harnessed.

Difficult conundrum

But how can new delivery methods achieve anything close to the savings needed, while achieving better outcomes for the public and raising standards? Daniel Burke, central government consulting director at PricewaterhouseCoopers, believes the public sector is still firmly at the start of the journey away from wholesale-style procurement to more organic, tailored, community-focused commissioning – and will need to move fast.

"It's really about fresh thinking and selecting the best types of providers to meet certain output achievements – working with community bodies and the voluntary and private sectors to think mutually and reorganise the traditional relationships between service providers and service users," he says.

Co-designed services are about commissioners engaging with service users at an early stage and tailoring delivery to their own specific needs. That might mean, for example, giving someone their own social care budget and letting them, with advice, choose how to spend it.

Deborah Szebeko, co-founder of the public sector design agency Thinkpublic, says a lot of work needs to be done on signposting services in a "softer" way to ensure they are being efficiently used. "There's a great shift to a more neighbourhood approach," she says. "We need to create an environment in which we can encourage people to be active citizens, and motivate them to decide what they want from their services. The service frontline should be more human. There are a lot of things we can learn from the private sector – it's not just tokenistic engagement."

Steve Johnson, corporate director of Capital Ambition, London councils' public service improvement body, strikes a similar tone: "We need to realise that people aren't passive consumers, as their involvement is at the heart of this... cost savings come in because the users are doing things for themselves."

Johnson likens the change in public sector delivery models to the shift from a market counter to a supermarket. "Whereas someone else used to fetch all our goods for us," Johnson says, "now we're happy with getting it ourselves. The time cost is transferred to the consumer, who is empowered by more freedom and ownership."

Goodbye to the little guy?

The shift to these new methods of delivering services has its drawbacks, of course. How can small-scale social enterprises and charities make competitive bids for service contracts when they are up against much larger bodies, which have the economies of scale and procurement experience available that enables them to trump the bids of smaller organisations?

"The dilemma facing commissioners who want to involve the more innovative civic providers is that they're under intense pressure to cut budgets shortterm," says Burke. "The more innovative providers are unlikely to be the cheapest bidders. A small start-up or charity is unlikely to win a contract on cost alone."

Burke says there are two ways that charities in particular can get involved: "The first is to become better at demonstrating their value, in the sense that they are committed to better outcomes over time, rather than shortterm gains. The second, and we're already starting to see this happen, is by making partnerships with larger companies and organisations, providing their innovation and expertise but getting in return the economy of scale need to competitively bid for services."

Capital Ambition's Johnson is concerned about the impact of the rigorous risk-assessment that must be undertaken in the public sector – especially when dealing with the most vulnerable members of society. "What happens when things go wrong with the service of a smaller social enterprise?" he asks. "Where is the accountability? And is the fairness matched across the country?" Johnson believes there needs to be some kind of pre-condition to safeguard the most vulnerable.

The answers to these questions are tied to just how these new service deliverers are funded. Initial access to money to recruit a start-up team can be hard, though innovative new streams such as social impact bonds – investments in positive social outcomes that ultimately save society money – are becoming more commonplace. Employee-owned organisations, or co-operatives, are also emerging and being labelled the "John Lewis" approach to public services. Central Surrey Health, for example, is a not-for-profit organisation that provides community nursing and therapy services and is co-owned and run by its 770 employees. The business has automated its referrals system, getting rid of cumbersome paperwork, which has resulted in lower costs and shorter referral times.

Thinkpublic's Szebeko realises the scale of the challenge, particularly in motivating traditionally passive service users into getting involved: "More than ever, we have to listen and understand people's needs. The biggest challenge is to engage with the vast numbers of people who won't stand up to be counted and use their voice. It's a massive and complex task."

Johnson likens the shift to that of a "pre- Beveridge Britain", where parish councils and small community organisations took care of social care and other services. "It's the toughest climate for a lifetime," he says. "But I think chief executives appreciate the scale of the challenge."